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Why Is Parker-Hannifin (PH) Down 3.4% Since the Last Earnings Report?

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About a month has gone by since the last earnings report for Parker-Hannifin Corporation (PH - Free Report) . Shares have lost about 3.4% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Parker-Hannifin Q4 Earnings Beat, Sales Up, View Strong

Parker-Hannifin kept its impressive streak of beating estimates alive for the eighth consecutive quarter, as its adjusted earnings of $2.45 per share for fourth-quarter fiscal 2017 trumped the Zacks Consensus Estimate of $2.31 by 6.1%.

The earnings figures reflected impressive growth of 29% on a year-over-year basis. The year-over-year improvement in the bottom line came on the back of remarkable revenue expansion, improved margins and the revamped Win Strategy.

For fiscal 2017, Parker-Hannifin reported adjusted earnings of $8.11, which reflected growth of 26% over fiscal 2016.

Inside the Headlines

Net sales in the fiscal fourth quarter jumped 18% year over year to $3,496 million, but lagged the Zacks Consensus Estimate of $3,521 million. Contribution from the CLARCOR acquisition and excellent performance in the company’s Diversified Industrial segment were major growth drivers. Organic sales increased 6% year over year.

For fiscal 2017, sales came in at 12 billion, reflecting 6% year-over-year growth.

Parker-Hannifin’s adjusted total segment operating income for the reported quarter was $587.6 million, up 27.1% from the year-ago tally of $462.3 million. Orders also increased 8% in aggregate for the company.The company saw order growth for the fourth consecutive quarter, reflecting improving demand in key end markets and regions.

Segmental Performance

At the Diversified Industrial segment, North American sales for the quarter jumped 32% to $1,665 million. Additionally, this segment recorded 10% growth in orders on a year-over-year basis.

Industrial International, which is also classified under the Diversified Industrial segment, performed strongly as well, as it reported a 12% year-over-year increase in sales to $1,228 million. In addition to robust sales growth, orders at this segment also increased 10% on a year-over-year basis.

Revenues at the Aerospace Systems segment were almost flat year over year at $602.8 million. Orders grew 1% at this segment in the quarter under review.

In addition to strong sales growth, Parker-Hannifin achieved robust operating margins during the reported quarter as well.Adjusted segment operating margins during the reported quarter came in at 16.8%, up 120 basis points year over year. In addition to accelerated revenue growth, successful execution of the company’s Win Strategy initiatives drove margins.

Liquidity

As of Jun 30, 2017, Parker-Hannifin’s cash and cash equivalents were $884.9 million, down significantly from $1,221.7 million at the end of fiscal 2016. Long-term debt was $4,861.9 million at year end, substantially higher than $2,652.5 million at the same time last year.

Acquisitions

In the fiscal third quarter, Parker-Hannifin completed its most notable acquisition agreement to buy air filtration systems provider – CLARCOR Inc. – for roughly $4.3 billion in cash. CLARCOR is bringing a range of industrial air and liquid filtration products and technologies to the table, which will significantly boost Parker-Hannifin’s filtration product suite. Moreover, this acquisition will unlock fresh recurring revenue streams for Parker-Hannifin’s Filtration Group as 80% of CLARCOR’s revenue is generated through aftermarket sales.

The company is bullish on the integration of CLARCOR with its filtration business, which will help it double sales at this unit and optimize the aftermarket mix of Parker-Hannifin.

Further, on Feb 1, Parker-Hannifin announced the acquisition of Helac Corporation, which specializes in the design and manufacture of helical rotary actuators. Helac also manufactures a line of attachments used in material handling and construction equipment markets.

Helac will be integrated into Parker-Hannifin’s Cylinder Division within the Hydraulics Group and its sales will be reported under Parker's Diversified Industrial segment. The addition of Helac will aid Parker-Hannifin in expanding its hydraulics product portfolio and cater to customers in a wide variety of markets.

The company is currently integrating these two filtration units into its businesses. We believe that these acquisitions will unlock, significant synergies, and drive growth for the company in the times to come.

Guidance

Parker-Hannifin issued guidance for the fiscal year ending Jun 30, 2018. Adjusted earnings from continuing operations are expected to come in the range of $8.45–$9.15 per share. This guidance is adjusted for expected business realignment expenses of approximately $58 million, and CLARCOR acquisition-related expenses of $52 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to one lower.

Parker-Hannifin Corporation Price and Consensus

VGM Scores

At this time, Parker-Hannifin's stock has a strong Growth Score of A, though it lags on the momentum front with a C. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value and to a lesser degree momentum.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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